With the clock ticking down to COP26, it’s been hard in the past months to avoid the noise around ESG and sustainable finance. On one side, the banking and finance industry has been busy arguing that it is on the side of the angels when it comes to climate change and that ESG investment and green finance will save the planet. And on the other, NGOs and other sceptics (like Al Gore) have been busy arguing that a lot of this is ‘greenwash’ and that the industry is still happily financing companies that have done a good job at causing this problem in the first place.
At capital markets think tank New Financial we have been benchmarking the claims and counterclaims around ESG and sustainable finance – and it’s clear that both have an element of truth.
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So, what’s the summary?
The value of ESG activity in banking and finance - that is, investment and capital raising designed to address environmental, social and governance issues - has increased about fivefold in the past five years. But, for all noise, this sort of business still only represents a small proportion of overall activity. And asset managers and banks are finding it really hard to translate their public commitment to ESG and saving the planet into concrete action.
What sort of numbers are we talking about?
Big ones: last year, companies around the world raised $570bn in ESG bonds, where the money is allocated towards a specific green or social project (that’s five times more than in 2016). And the value of ESG investment funds is nudging $2 trillion (up four times over the same period).
That sounds pretty big, no?
That’s a lot of money in anyone’s books - but it still only represents less than 6% of all global activity in those sectors of banking and finance where you can actually measure it. In large parts of the industry, such as bank lending to companies, retail banking and insurance, equity markets and derivatives, there is no clear ‘ESG’ activity or no comparable data, so the real level of ESG activity across the industry is much lower, probably just a few percent.
So how committed is the financial services industry to ESG?
Not as much as you might expect. One indicator is the high but not universal level of public commitment to ESG across the financial services. There are hundreds of well-meaning ESG initiatives out there, and you might have thought that signing up to them would be virtually cost free. But we found that only 40% of the 2,000+ largest asset managers, banks, insurance firms, pension funds and stock exchanges around the world had done so (though in Europe, closer to two thirds of the biggest firms have made these sorts of pledges).
Where does the UK fit into this?
Last week the government published a new roadmap on ‘Greening finance’ and is keen to promote the UK as an international financial centre for ESG and sustainable finance. While the UK has expertise, big pools of capital, and a huge pool of talent in finance, it has a lot of catching up to do.
Whisper it quietly, but the EU has a global lead in ESG activity: for example, ESG investment funds represent 6% of all funds in the UK, less than half the 13% in the EU. ESG corporate bond issuance by UK companies accounts for just 4% of all issuance, compared with 11% in the EU. In these sectors, ESG in the UK is roughly four to five years behind the EU (and the US is even further behind).
Is this really going to save the planet?
At this rate, no. First, there are serious and growing concerns that a lot of activity that is branded ‘ESG’ is more about marketing than addressing climate change. And second, in the background, banks and investors still seem quite happy to finance companies with less than impeccable ESG credentials. Our analysis showed that over the last five years, ‘bad ESG’ companies (mainly in the oil, gas, and mining sectors) raised 10 times as much money in global capital markets as ‘good ESG’ companies (such as renewable energy firms). For all the PR and marketing, the growth in ESG has not yet translated into concrete change in the balance of funding for ‘green’ and ‘brown’ companies.
So what happens next?
The next few years will be crunch time. Governments and regulators are putting more pressure on companies to come up with serious plans to get to net zero, and more pressure on banks and investors to hold them to account in doing so. In the meantime, regulators are taking a closer look at the whole ESG industry.
And then what?
Perhaps we’ll only know if all of this has worked when we stop talking about ‘ESG funds’ and ‘sustainable finance’ and start thinking about it as business as usual, and we just call it ‘finance’ instead.
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